The Interaction of Different Governance Mechanisms
Corporate governance comprises many dimensions. Based on the U.K. Code, it can be divided broadly into the role of directors, directors’ remuneration, the role of shareholders, and accountability and audit.
Some of the structures are complements while others are substitutes to certain extent. The previous research has found different governance patterns. For example, Peasnell et al. (2001) find evidence of a convex association between the proportion of outside board members and the level of insider ownership in the U.K. corporate control process. Shivdasani and Yermack (1999) observe, using U.S. data, that when the CEO serves on the nominating committee or no nominating committee exists, firms usually appoint fewer independent outside directors and more grey outsiders. Similarly, Vafeas (1999) discover that the likelihood of engaging a nominating committee is related to board characteristics such as inside ownership, number and quality of outside directors for U.S. firms.
Board structure is an important governance mechanism. Kenneth et al. (1995) note the substitution effects between outside directors, blockholders, and incentives to insiders using eighty one U.S. bank-holding companies in his study. Both Dedman and Elisabeth (2002) and Young (2000) investigate the board structure determinants before and after Cadbury Report. They either find managerial entrenchment is reduced or non executive directors are increased following the imposition of new standards of “best practice” regarding board structure.